Legal High Jinx With Compliance

Roll Call is reporting that the US Congress should review the “common bond” standard for Credit Union status. This comes on the heel of the National Football Association, the sports league, that has been operating under a tax-exempt status for trade and professional associations.

NFL (credit Regie’s Take)

The NFL was considering itself an association of professional football players and that the league managers were hired by the professionals to manage the league. Well, this is really rather far from the truth. The league is run by people who mostly represent the team owners, who are not the professionals. In order for the league to truly meet the standard, the team owners would also have to be hired by the players to manage them. What astonishes me is that Congress is not pursuing back-taxes from the NFL. I hope the IRS does. The US government could be looking at getting back close to $200 Million from back taxes over the past three or four decades. (I don’t know when the league organized as a professional association, so I don’t know if I can take this claim back to its origins.)

That was an aside to the main issue. CU’s were designed to be tax-exempt so that banking services can be provided to low- and moderate-income households while reducing risk by requiring a “common bond.” The common bonds used to be applied rather strictly. CU members had to be all employees of a sponsoring employer or all members of the same trade association. But the common bond definition has expanded. Expanded by how much? Well, New York City has one for anyone living within the city boundaries. That’s more than 8 Million people who qualify. The largest CU’s are much larger than community banks.

Not only is there an issue of tax revenue, but compliance issues. CU’s do not have to meet many of the banking compliance standards and rules. This is so because, supposedly, they are like community banks, small, local and limited in products and services. Some of this is true. CU’s take deposits and have loan products like credit cards, home and auto loans and student loans. But many have insurance and retirement plans. They are just one step away from providing brokerage services. Some provide near-brokerage service by providing financial advisors. Plus, less than a third of CU customers meet the definition of low- and moderate-income earners.

I don’t have a solution for any of this. I certainly have my opinions. But economically, this is a much more complex issue than the way it has been laid out by all sides. From a compliance perspective, I am generally of the opinion that standards should really be set by activity, not by size of an institution. But politics often makes it difficult to apply rules in this clear cut manner and often set arbitrary standards, like size of institutions.